Managing Climate Finance

A bulk of the accumulated GHGs, the reason for global warming, have come from a group of about 40 rich and industrialised countries, usually referred to as Annex I countries in the 1992 UNFCCC.
The contribution of the poorer countries (the Global South) was negligible.
Additionally, countries in the Global South were already struggling to pay their external debt, exacerbated by the pandemic.

Mechanisms that made industrialised countries liable:

The Kyoto Protocol (1997) recognised the “common but differentiated responsibilities” in the fight against climate change.
The Paris Agreement (2015) asked countries to set voluntary emission targets but required the richer countries to make financial transfers to the developing economies.
- It set a floor of $100 billion per year (that the developed countries had committed to raising from 2020) for these transfers.

Concerns:

The definition of climate finance states that counting commercial loans should not be done.
In 2020, countries transferred $83 billion into the climate finance fund to be paid to the countries of the Global South.
Out of this, less than $25 billion was in the form of grants.

Recent efforts to boost climate finance:

New Global Financing Pact
The EU has put forward a proposal, called the Carbon Border Adjustment Mechanism (CBAM).

CBAM:

Active imposition of tariffs on imports from other countries is involved when those countries are observed to be using carbon-intensive methods of production.
This mechanism, starting in 2026, will cover products such as cement, steel, aluminium, oil refinery, paper, glass, chemicals and electricity generation.

The CBAM is expected to achieve three objectives:

Reduce the EU’s emissions, for the EU not lose competitiveness in carbon-intensive goods and to make the targeted countries reduce the carbon intensity of their exports.

Issues with CBAM:

The CBAM is a unilateral move, against the spirit of multilateralism.
It could be used for protectionism.
Rich countries design equity considerations to avoid paying for creating the climate problem.
It targets production processes (not the product itself) that the WTO does not approve of.

How will it affect the Global South? This mechanism seeks to penalise “free riders” – one who is not contributing, although has the means to do so.

Most affected:

Only 3 of the 12 exporters to the EU have a mechanism for “pricing carbon”.
The countries most affected will be Russia, Ukraine, Turkey, India and China.

Way ahead:

A global price for carbon to redress the global “externality”.
Clarity on the following before CBAM is implemented:
- First, which countries will be exempt? These are likely to be those that possibly have a national emissions cap or a sectoral cap or are the poorest countries.
- Secondly, the levying of the import tax includes the inclusion of which emissions.
- Possibly, the inclusion will focus on products with narrow coverage but high trade and carbon exposure.

Managing Climate Finance Mechanisms,Managing Climate Finance Mechanisms